Are Mortgage REITs On The Verge of A Rebound?

Nothing stays the same forever on Wall Street. Today's hot sector is tomorrow's sector to avoid and vice versa. In April 2020, oil prices were essentially below zero, and today oil is priced at $87.65. One year ago, nobody wanted tech stocks, but the advent of artificial intelligence (AI) changed that in a hurry.

Investors who have watched the huge declines in real estate investment trusts (REITs) since the beginning of 2022 can take heart in knowing that as economic or political cycles change, prices will ascend once more. One REIT subsector that's been hit particularly hard over the last 22 months is mortgage REITs (mREITs). Rising interest rates have crushed many REITs in this group.

But some mREITs have recently been showing signs of life. Take a look at three mREITs with recently improved performance that could be on the verge of a rebound.

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Hannon Armstrong Sustainable Infrastructure Capital Inc. HASI is an Annapolis, Maryland-based mREIT that is also considered a specialty REIT. It provides mortgage loans for renewable energy projects and owns stakes in a portfolio of solar and wind projects and other energy-efficient endeavors. Its business model and $4.9 billion portfolio are designed to invest in energy transitions that will improve the climate future.

Hannon Armstrong's chart since 2020 looks like a roller coaster with steep sell-offs and rapid ascensions. Its shares peaked at $64.30 in January 2021 and have declined significantly since then, with a dismal total return of negative 67.49%.

To its credit — unlike many other mREITs — Hannon Armstrong did not cut its dividend during the decline. Over the past 10 years, Hannon Armstrong has grown its dividend 558% from $0.06 per share to $0.395 per share with no suspensions or cuts. The forward annual dividend of $1.58 per share yields 9.65%, but the payout ratio is manageable at 76.24%.

The long decline recently was interrupted as Hannon Armstrong jumped 23.8% since bottoming on Oct. 6 at $13.22. On Oct. 10, Robert W. Baird & Co. analyst Ben Kallo chose Hannon Armstrong as a Fresh Pick and reiterated an Outperform rating on the REIT. Kallo cited its portfolio diversity, strong financials and lesser exposure to interest rate risks for his bullish comments.

On Sept. 20, Morgan Stanley maintained an Equal-Weight rating, while reducing the price target from $26 to $24.

Hannon Armstrong joined the S&P SmallCap 600 in mid-September. It has led all mREITs in performance within the last week.

MFA Financial Inc. MFA is a New York-based mREIT that invests in residential mortgage-backed securities (MBS) and residential whole loans.

Since the beginning of 2022, MFA Financial has declined 37.4% from $14.65 to a recent closing price of $9.17. A 1-for-4 reverse stock split in April 2022 cut the stock price in half. But since bottoming at $8.44 on Oct. 4, MFA Financial has climbed back 8.6%. And over the past 52 weeks, MFA Financial has had a total return of 23.63%.

On Oct. 10, Zacks Investment Research Inc. upgraded MFA Financial from Neutral to Outperform. Wedbush Securities also has an Outperform rating on MFA Financial.

The quarterly dividend of $0.35 imparts an annual dividend of $1.40, which presently yields 15.27%. The question is whether the dividend is sustainable, given that the payout ratio is a risky 95.8%.

On Aug. 3, MFA Financial reported its second-quarter operating results. Non-generally accepted accounting practices (GAAP) earnings per share (EPS) of $0.40 beat the estimates by $0.06. Revenue of $44.51 million missed estimates of $53.96 million and was 15.36% below revenue of $52.58 million in the second quarter of 2022. Its third-quarter earnings report is scheduled for Nov. 7.

Arbor Realty Trust Inc. ABR is a Long Island, New York-based mREIT that initiates bridge and mezzanine loans for commercial and residential properties. Many of its loans originate through Fannie Mae and Freddie Mac programs.

Arbor Realty Trust generates profits by the spread between the cost of financing a loan and the interest earned from that loan. Many of Arbor Realty Trust's commercial loans are first mortgage liens that are short term with higher interest rates.

On July 28, Arbor Realty Trust reported its second-quarter earnings. EPS of $0.57 beat the estimates of $0.44 by 29.55% and was a 9.62% increase over EPS of $0.52 per share in the second quarter of 2022. Revenue of $108.54 million beat the estimates of $99.11 million and was a 15.15% increase over revenue of $94.28 million in the second quarter of 2022.

Arbor Realty Trust raised its quarterly dividend in July from $0.42 to $0.43 per share, the 12^th time it has done so in the last 14 quarters. The annual dividend payout of $1.72 per share presently yields 12.09% and has a five-year growth rate of 12.89%.  

Arbor Realty was performing well until the end of July when Piper Sandler analyst Crispin Love double-downgraded it from Overweight to Underweight. The share price then dropped from a peak of $17.28 to a low of $13.29 on Oct. 4. Since then, Arbor Realty Trust has bounced back 7% to a recent closing price of $14.23.

Please note: mREITs, despite their enticing lofty yields, can be volatile and may not be suitable for more conservative investors.

Weekly REIT Report: REITs are one of the most misunderstood investment options, making it difficult for investors to spot incredible opportunities until it's too late. Benzinga's in-house real estate research team has been working hard to identify the greatest opportunities in today's market, which you can gain access to for free by signing up for the Weekly REIT Report.

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